The Real Death Panel

I’ve just spent 90 minutes listening to five Washington hands discuss “the financial and economic consequences of an exploding debt.” The prognosis, they agree, is grim. The chances of policymakers acting any time soon to address the looming fiscal crisis are remote. As one audience member asked the panelists during the Urban Institute discussion, “Which anti-depressant should I take?”

Before grabbing the Prozac, it might be worth thinking about what the panelists said. Urban’s Bob Reischauer and Rudy Penner (both former CBO directors), American Enterprise Institute Congress-watcher Norm Ornstein, TPC co-founder Len Burman, and international economist Mike Mussa agreed that the depths of the medium and long-term problem can’t be overestimated.

The projections are depressingly familiar. Within a decade, the ratio of debt to GDP is likely to reach heights unseen since the end of World War II. In a couple of decades, interest payments alone—much owed to foreign investors-- will vastly exceed any conceivable ability of the government to raise tax revenues. Massive government borrowing will almost surely crowd out the ability of private companies to raise needed capital. And the potential will grow for hyper-inflation and a ruinous devaluation of the dollar. After a few minutes of this, it was no wonder Ornstein called this crowd the real death panel.

Yet, policymakers do nothing. Well, they do something. They make the problem worse. Massive tax cuts, a huge Medicare drug benefit, unfunded wars, and now a costly new health insurance reform that is very likely to be underfinanced. Then, of course, there is the staggeringly large fiscal stimulus, some of which will almost surely be made permenant.

Why can’t pols see what is so obvious to people like Penner, Burman, Reischauer et al?In part, as Reischauer says, their fears have become almost trite. For years, deficit hawks have warned about the dire consequences of profligacy. Yet, the world still spins on its axis, the sun rises in the morning, and Treasury sells its debt with ease. Indeed, yields for 30-year Treasury bonds are well below 5 percent—a signal that investors are hardly worried about Washington’s ability to raise money.

Mussa, who spent a decade at the International Monetary Fund and is currently a senior fellow at the Peterson Institute for International Economics, figures it could be years before overseas investors turn bearish on the U.S. In part, he says, that’s because net foreign lending has actually fallen in the past two years—their huge increases in investments in Treasury paper have been more than offset by shrinking portfolios of private debt.

But that won’t last. Once the economy begins to get back on track, private capital and government will again compete for the same foreign money—bad news for everyone seeking funds.

Is there any way out? Ornstein sees little chance that a hyper-partisan Congress will confront the budget crisis in the absence of a financial market crisis, or even in the face of one. Interestingly, Burman, Mussa, and Penner think that when the fix finally comes, it will include a Value-Added Tax. Penner calls it “almost inevitable.”

But when? For now, if you worry about such things, Prozac might be your only friend.

Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.